TMI Blog2007 (11) TMI 451X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenses incurred by the assessee before the commencement of business? The alternative question was whether, even if the impugned amount was to be taxed under the residuary head, the assessee was entitled to deduct interest and other expenditure incurred for earning this income? The second issue was whether, interest on loan given to employees was chargeable to tax under the residuary head? 2. In the assessment order, it is inter alia mentioned that the assessee-company was incorporated on 22-10-1991 and it acquired rights in residential as well as flatted factory under DCM Green Area Scheme and DCM Techno Plaza Scheme for a consideration of Rs. 2,51,17,17,965. These rights were shown as such in the opening and closing stocks. There has been no purchase or sale of any right other than the ones mentioned above till this year. Therefore, in the past it was held that the business of the assessee had not commenced and this position was accepted by the assessee. 2.1 During the year under consideration also, there has been no purchase or sale of any property or right therein. However, an income of Rs. 1,45,29,827 was received by it, being interest on advance of Rs. 1.15 crores m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activities, which were inextricably linked with setting up of the business, was to be adjusted against the project cost. In the alternative, it was claimed that the assessee had incurred an expenditure of Rs. 114.11 lakh, consisting of interest of Rs. 70.14 lakh till 31-3-1998, guarantee discharge expenses of Rs. 15.00 lakh, legal expenses of Rs. 9.94 lakh and salary, wages and other administrative expenses of Rs. 19.03 lakh, which may be allowed against the interest income. Thus, it was argued in the alternative that these expenses should be allowed in computing the income under the residuary head. 2.3 The Assessing Officer considered the facts of the case and various submissions made by the assessee. He referred to the facts of the case of Bokaro Steel Ltd. ( supra ) and pointed out that the receipts were by way of interest on advance to contractor, rent of quarters let out to employees of the contractor, hire charges of plant machinery let out to contractor, royalty on stones recovered from assessee s land, which were directly and intimately connected with the setting up of the business of the assessee. However, the income in this case was earned from advance made to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MOU, which stipulated interest at the rate of 20 per cent on the advance in case the agreement, consequential to the MOU, was not executed before the specified date. There was also mention of compensation in case the agreement was not signed in pursuance of the MOU. It was his view that the development of the property was not the pivotal source of income of the assessee. The amount was received in the normal course of business on the advance made by the assessee to the PDL. The argument that the impugned amount of Rs. 1.45 crore was compensation and hence a capital receipt did not stand scrutiny because as per assessee s own assertion, the profits to be earned from the project were in the vicinity of Rs. 200 crore. The amount was received in the normal course of business and there was no impairment in the source of income as the agreement, pursuant to the MOU, was not even signed. Therefore, the ratio of the case of Tuticorin Alkali Chemicals Fertilizers Ltd. ( supra ) was applicable and the income was rightly taxed by the Assessing Officer under the residuary head. Thus, the appeal of the assessee was dismissed on this ground. 4. Before us, it was pointed out that in the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m. In case of failure to sign the collaboration agreement on or before 30-4-1995, the aforesaid amount and any amount paid or payable by the assessee for standing guarantee became payable to it along with interest at the rate of 20 per cent per annum, calculated on a quarterly basis. In pursuance of the MOU, the assessee paid a sum of Rs. 1 crore to the PDL on 3-2-1995 and a further sum of Rs. 15 lakh on 27-3-1995, as witnessed by receipts placed on pages 57 and 58 of the paper book. The assessee had borrowed the money from DCM Estates and Infrastructure Ltd., New Delhi, on interest. Since the agreement could not be signed as the creditors of PDL filed suits for recovery of their dues, the interest clause came into operation. The assessee also preferred claim, arising out of the MOU, before the court. The disputes were finally settled by the Hon ble Supreme Court vide order dated 1-5-2001. The assessee had made a claim of Rs. 3,81,29,018 for the reason that it was granted the first right to develop the entire Madras property under the MOU. This claim was not disputed by the PDL. On the contrary, the assessee and the PDL came to a settlement under which the assessee agreed to rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt pointed out that in order to maintain consistency, the appeal was not required to be entertained and accordingly the same was dismissed. 4.3 Coming to the merits, it was pointed out that the case of Tuticorin Alkali Chemicals Fertilizers Ltd. ( supra ) was wrongly applied as in that case surplus money was placed with the bank to earn interest income. The Hon ble Court pointed out that a company could earn income under the head other than the business head, even in the course of setting up of its business. If such an income accrues, then it is taxable under the appropriate head. However, such was not the case here. The assessee had entered into a MOU with PDL for developing property at Madras. One of the conditions was to place interest-free advance of Rs. 1.50 crore as a consideration and another condition was to make available similar funds from any company by standing guarantee. The assessee borrowed funds and placed advance of Rs. 1.15 crore. It was not a case of utilization of surplus funds, but one of borrowing the money on interest and placing it as an interest-free advance for acquiring interest in developing the project. Thus, the facts of this case were disting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stency. He also relied on the decision of Hon ble Delhi High Court in the case of CIT v. Koshika Telecom Ltd. [2006] 287 ITR 479 , in which the assessee had to deposit margin money for obtaining telecom licence. It was pointed out that since the deposit was linked with the business of the assessee, interest on the deposit partook the character of business income. He also relied on the decision of Hon ble Madras High Court in the case of CIT v. Indo Matsushita Carbon Co. Ltd. [2006] 286 ITR 201 , in which it was held that interest received on belated payments had a direct nexus with the business of the assessee and, therefore, such interest was the profit of the business for the purpose of computing deductions under sections 80HH and 80-I of the Act. He referred to the finding of the learned CIT(A) in which it was pointed out that the projected profits from the project were in the vicinity of Rs. 200 crore. However, he also came to the conclusion that the compensation received was not on account of any loss of business, but it was on account of loss of profits. It was his case that there was a contradiction in this finding inasmuch as the project, if implemented, would have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id, guarantee charges paid and other administrative expenses were deductible and the balance so left was nothing but the capital receipt in lieu of the other rights acquired under the MOU. 6. We have considered the facts of the case and rival submissions. The accepted facts are that the assessee had not set up its business, as it had carried out any development work in DCM Green Areas and DCM Techno Plaza. It sought to acquire development rights in Madras property of PDL by entering into a MOU, which gave it first right to develop the property. However, such a right was to come into force after signing the collaboration agreement, which was not signed at all. In consideration, the assessee placed interest-free advance of Rs. 1.15 crore with the PDL. It also arranged finance of an equivalent amount for the PDL by standing guarantee. The MOU stipulated that in case of failure to execute a binding contract of collaboration, the assessee will became entitled to receive interest 20 per cent p.a., computed on a quarterly basis from the date of advance of the money. These facts show that the assessee never acquired any right for developing Madras property as no binding contract was si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt case, admittedly no business was carried on and the assessee did not acquire any vested right in development of the land. In such circumstances, we are of the view that the ratio of the decision in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. ( supra ) is applicable and, therefore, the income is properly assessable under the residuary head. 6.1 It was also argued that since interest on borrowed capital was capitalized and other expenses were also capitalized in the past, the rule of consistency demanded that the receipt be taken as capital receipt going towards the reduction of the cost of project. We are unable to agree with this view also. The reason is that insofar as DCM Green Area and DCM Techno Plaza are concerned, the assessee held valuable rights in the project. The assessee did not acquire any right in development of Madras property. Therefore, inconsistency, if any, arises out of the fact that in the past interest was capitalized. We find that that decision was not taken on proper appreciation of facts of the case. In view of elaborate discussion, interest income has been held to be taxable under the residuary head and consequently it will follow tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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